Shepherds Investments Ltd & Anor v Walters & Ors

A director’s preparations for a competing business become unlawful when, assessed in their factual context, they conflict with the director’s duty to act in good faith in the company’s best interests. Public policy favouring competition does not override that duty. The same conduct may breach an employee’s obligation of fidelity.

A director must obtain informed consent after full disclosure before undertaking impermissible promotional acts. The duty may also require disclosure of another director’s actual or threatened activity which harms the company. A fiduciary who resigns and exploits a maturing corporate opportunity must account for resulting profits. Damages nevertheless require proof that the unlawful conduct, rather than lawful resignation or competition, caused the claimed loss.

Former directors and employees of two investment businesses planned and established companies offering investment in whole US life policies. Much of the planning occurred before their respective employments ended and without disclosure to their employers. The claimant sought damages or an account of profits for breach of fiduciary duty, breach of the employee’s obligation of fidelity, breach of express contractual terms, diversion of a corporate opportunity and misuse of confidential information.

The court determined whether one senior employee was a de facto director; when preparations for a rival business become unlawful; whether a whole-policy fund was a maturing business opportunity; whether the preparations breached express employment terms; whether confidential information had been misused; and whether the breaches caused compensable loss or required an account of profits.

1. Liability was established in substantial part. Mr Simmons had assumed the role of a de facto director. He held himself out, and was held out by the company, as a director and performed a senior role in its investment business. He therefore owed fiduciary duties notwithstanding his lack of formal appointment.

2. The controlling inquiry was whether the preparations for a competing business conflicted with the directors’ duty to act in good faith in their companies’ best interests or with the employees’ obligation of fidelity. Public policy concerning restraint of trade did not override those duties. The dividing line was fact-sensitive: merely deciding to compete and possibly consulting advisers could be lawful, while soliciting customers or actually trading would ordinarily be unlawful.

3. By 12 August 2003 the individual defendants had irrevocably decided to establish a rival investment business and were taking extensive steps to implement it. Those steps created a plain conflict between their duties and personal interests. They acted without informed consent following full disclosure and consequently breached their respective fiduciary duties and obligations of fidelity.

4. Disclosure was not a separate fiduciary duty. It was an application of the fundamental duty of loyalty. A director undertaking impermissible promotional activity must disclose the intended conduct and obtain informed consent. Each defendant was also obliged to disclose the actual or threatened competing activity of the others which damaged the relevant company’s interests.

5. Mr Simmons and Mr Hindle exploited a maturing opportunity to establish a whole-life-policy investment business which their companies had been considering. They were accountable under the principle applied in CMS Dolphin Ltd v Simonet. The finding did not extend to Mr Walters because he had not been shown to know of the opportunity and the companies had temporarily decided against pursuing it before his departure.

6. Mr Walters breached the express restriction on involvement in another business because, while still employed, he acted as compliance officer for businesses already conducting activities. Mr Hindle did not breach that term because the proposed companies had not been incorporated or reached the stage of conducting business when he left.

7. The confidential-information claims failed. The claimed business “model” was general market knowledge, and copying or use of an adviser list was not proved. The claimant also failed to prove that the unlawful head start caused financial loss. No inquiry as to damages was ordered. The claimant was, however, entitled to an account of profits made by the three individual defendants through their unlawful conduct after 12 August 2003.